Using a Personal Loan for Business: Is It a Good Idea?
It ultimately depends on your business needs. While it is obvious that taking out a business loan would give you the amount necessary, being able to obtain one is not as straight forward as you wish it could be. If you are a young business, with less than 2 years experience, lenders may be unwilling to work with you. Even if you are qualified, the application process leaves very little to be desired.
For this reason, aside from asking for from friends and families or convincing investors to part with their money, a lot of small business owners gravitate towards obtaining a personal loan.
If you are considering to apply for a personal loan to finance your business, here are 6 things to keep in mind before you go through with the process.
The Pros of a Personal Loan
1. Easier Qualification
Being a young business can be a challenge on its own as some lenders may not be willing to work with business that are under 2 years old. If they are, they may not offer favourable rates and terms.
This is where obtaining a personal loan comes into play. There is no need to provide extensive business documentation and your personal credit history and income are what your lenders look at. If you come with a strong credit history, lenders are more than willing to trust you with the funds you need
Unlike business loans where you may be required to put up a collateral (such as your inventory), if you are obtaining an unsecured personal loan, you are not required to put up a collateral.
Lenders do not have a rigid requirement for how you use and distribute the loan. Making it a perfect option for sole propriertors or self empoyed professionals.
The Cons of Using Personal Credit
1. Unable to build business credit
Any repayment activities will only affect your personal credit. Although you can cover some business debt obligation in the short term, the long term consistency is more important to your business credit rating.
What’s more, if you are unable to meet the personal loan obligations, you are risking your personal credit score and future ability to obtain any loan including business loans.
2. Limited Capital Amount
Because lenders look at your income and personal credit history, the amount you can get from them tends to be limited. With some lenders unwilling to provide more than $40,000. While this can be a good option for the short term, it does not help prepare for the long term
3. The Rate Can be Sky High
If you come with a strong personal credit history, the rates and terms can be favourable. However if your credit score is less than stellar, be prepared to get offerd higher than normal rate that can go as high as 36%
Online Lenders. The presence of online lenders allow small business owners to discover their options before comitting to one offer and you get a diverse list of choices from SBA loans to a business line of credit. Aditionally, with online lenders, the requirements tend to be more lax, with less paperwork, and quicker access to the capital (as little as 24 hours).
Business Credit Cards: just like personal loans, business credit cards are based on your personal credit score. To make them attractive, banks to tend to accompany the cards with sign up offers such as 0% APR and/or cashback features. Making it a viable options for recently established businesses
Bottom line is that you have options when it comes to additional business capital. Evaluate your personal and business financial position and what your business goals and needs are before making a decision. If the numbers make sense , you might benefit from personalizing your business finances a little bit.
The right financing will change the future of your business. Get Yours!